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Keeping Stability In Korea

The peninsula is crucially important for the region.

CEOs from around the world are targeting South Korea as both a market and a regional base of operations for their companies. The country’s $600 billion economy has been expanding steadily, with growth of 4 percent expected this year, and Korea is taking steps to become an increasingly important business and financial hub.

South Korea is a natural commercial center. It occupies a commanding location in the middle of a vital region that encompasses Japan’s sizable economic base, China’s rapidly growing economy, Russia’s vast energy wealth and Korea’s own growing economic importance. Diplomatically, South Korea has been astute at building strong links with its three larger neighbors, downplaying historical animosities and grievances, while promoting its strategic value as an international market crossroads.

As part of an overall effort to attract companies, the government has offered incentives through the Foreign Investment Promotion Act, which provides businesses with six foreign investment zones, or industrial parks. Under the act, high-tech companies with more than $1 million to invest are welcome rent-free, while manufacturing companies investing more than $10 million are given rent reductions of 75 percent.

Korea has also taken many significant steps to achieve an open trade environment. South Korea is a firm member of the World Trade Organization and has met its commitments, particularly in the financial services sector through the creation of independent regulatory agencies and in giving its central bank the proper autonomy.

In Seoul, Mayor Myung Bak Lee has taken many successful steps to enhance the global competitiveness of his city. Home to 10 million people, Seoul has an even higher level of GDP per capita than the national figure of $10,000, thanks to a sophisticated consumer base and work force. The metropolitan area has good infrastructure and is investing to keep pace with the country’s growth. The Pusan port is currently the third largest in the world and is projected to be handling one-third of the world’s container transportation volume by 2006. Seoul has a reliable power supply, and Korea is making multibillion-dollar investments to expand the nation’s highway system. Municipal authorities also are expanding Seoul’s extensive subway system. Further, the government is partnering with the private sector to improve an already advanced telecommunications infrastructure.

But despite its many strengths, Korea must still address some issues that impede its ability to thrive in a global environment.

Labor unrest is still a problem in Korea. The powerful unions are highly politicized and stand in the way of significant reform that would allow more flexibility in the hiring, retrenchment, transfer and reassignment of employees. Laws must provide more clarity on the definition of “just cause” for dismissal. Recently, however, there have been positive signs of the government taking a strong stance when it declared the wave of recent strikes in the summer of 2004 to be illegal. Foreign investors still put labor relations as the key deterrent to further investments in South Korea. The American Chamber of Commerce in South Korea surveyed 1,200 Asia-Pacific-region-based executives at the top 500 companies on labor flexibility and found that 65 percent rated the country “very low,” 27 percent “low” and only 8 percent “high.”

South Korea, which has a healthy and vibrant democracy, must also foster a political and economic climate where business people can be reasonably confident that the fundamental rules of law are not subject to abrupt and radical change. Also, the judiciary needs to resolve quickly commercial and financial market disputes. And, as an added challenge, Korea seems to be importing one of the more unfortunate aspects of the U.S. legal system by introducing class-action lawsuits.

While South Korea itself is a safe place to work and live, overhanging it is the nuclear threat of North Korea. The North Korea problem remains an obstacle that hinders foreign investment. The solution has to be one of engagement. As long as strategy remains frozen, there is little hope of a breakthrough. When the political situation on the Korean peninsula is one day peacefully resolved, the potential for a railroad spanning the region would give Seoul the opportunity to become an even more significant transportation hub.

Although there is always more work to be done, South Korea is well positioned to become an even more dynamic and prosperous participant in the global economy.

M.R. Greenberg is chairman and CEO of American International Group and chairman of the U.S.-Korea Business Council.

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